Home' Trinidad and Tobago Guardian : December 10th 2015 Contents BG8 ENERGY
BUSINESS GUARDIAN www.guardian.co.tt DECEMBER 10 • 2015
Investors are betting on the oil price stay-
ing lower for even longer after OPEC s
decision to ditch a formal production
ceiling, pushing US crude futures for
delivery nearly 10 years away below
US$60 a barrel.
This could possibly harm the ability of US
shale producers, among the casualties of OPEC s
strategy of pumping hard to retain market share,
to lock in profitable prices for future deliveries.
US crude futures for front-month delivery
fell below US$40 per barrel on Monday after
the Organisation of the Petroleum Exporting
Countries failed last week to agree on an output
target to reduce a bulging oil glut that has cut
prices by over 60 per cent since 2014.
In the run-up to the OPEC decision, oil deriv-
atives showed investors had, unusually, been
willing to pay more to protect against a surprise
rally in the price, than a surprise fall.
That bet has now been unwound, meaning
they are once again expecting a higher likelihood
of further declines than that of a bounce back.
The most popular options contract is one that
gives the holder the right to sell crude oil futures
at just US$35 a barrel.
"Oil is going to make lower lows and lower
highs for the foreseeable future and, in terms
of market reaction post-OPEC, I m not surprised,
but it does leave the door open for prices to
fall," Gain Capital analyst Fawad Razaqzada said.
Loss of confidence
As recently as late November, US crude for
December 2022 delivery and onward was trading
slightly above US$60 per barrel, but following
the OPEC meeting, contracts out to December
2024 are below US$60, trading data shows.
"It means that there is a loss of confidence
in the market after OPEC, and people expect
low prices to last longer," said Oystein Berentsen,
managing director of crude oil at Strong Petro-
leum in Singapore.
"Hence the back of the curve will be under
pressure from producer hedging via selling the
back of the curve to limit loss or lock in a small
profit to reduce risk."
Goldman Sachs said after the OPEC-meeting
that it expected oil prices to remain "lower for
longer," with a risk that oil prices could fall as
low as US$20 per barrel.
"The rising probability that markets may need
to adjust through operational stress , when sur-
pluses breach capacity, leaves risks to our forecast
as skewed to the downside in coming months,
with cash costs near US$20 per barrel," the bank
Bearishness has been brewing in the derivatives
market for some time. Options data shows hold-
ings of December 2016 put options at US$25,
US$30 and US$35 a barrel have risen 41 per cent
in the last two months and open interest in
those three contracts now equates to nearly 90
million barrels of oil.
"Price levels just aren t high enough for many
shale producers to hedge," said Mark Keenan of
"In addition, due to the short production
timelines associated with many shale wells
because of their steep well depletion rates, there
is little need to hedge five years or more into
the future." Reuters
The Venezuelan government
suffered a huge electoral loss
last Sunday. The opposition
won a majority of seats in
the parliament, a striking
blow to Venezuelan Presi-
dent Nicolas Maduro.
Maduro s ruling party lost its majority
for the first time in sixteen years. The result
can largely be chalked up to the collapse in
crude oil prices, which has shattered the
economy, drained government coffers, and
left the country s currency in tatters.
Despite the crisis, OPEC declined to throw
Venezuela a lifeline on December 4, and not
for a lack of trying on behalf of the Venezue-
lan delegation. The South American nation
pleaded its case with its fellow OPEC mem-
bers, calling for a lowering of the collective
output target by five percent. But largely
due to the uncertainty over how much extra
production is set to come back from Iran,
OPEC failed to agree on a production tar-
get.Without a quick fix in oil prices, the only
option left for Venezuela is the tougher task
of addressing the problems within its own
domestic oil sector.
Admittedly, this won t reap benefits in
the short-term, but Venezuela consistently
underperformed even before the collapse in
oil prices, so there is no time like the present
to begin addressing the problems at the
There is a lot to work with. Venezuela
has the world s largest proven oil reserves;
its 298 billion barrels exceed even Saudi
Arabia s reserves (268 billion barrels). It has
large but mature and declining conventional
production in the Maracaibo Basin in the
northwest. It also has massive deposits of
heavy bitumen in the Orinoco Belt.
But these resources have been well known
for quite some time and PDVSA failed to
invest in boosting production during the
years of high commodity prices. The state-
owned firm has seen production fall by
800,000 barrels per day since 1998, as the
lack of investment in new output has been
decidedly swamped by the depleting pro-
duction from existing fields.
The problem for Venezuela was com-
pounded by the fact that net oil exports fell
by even more, as noted in a September 2015
report from Columbia University s Center
on Global Energy Policy. This is a conse-
quence of heavy subsidies, which cuts into
exports in two ways.
First, Venezuela has some of the cheapest
gasoline in the world. Motorists can fill up
their vehicles for a few cents per gallon.
The high levels of domestic consumption
result in less oil left over for export. A second
way subsidies reduce oil exports is through
smuggling. Subsidised oil opens up a rel-
atively easy arbitrage opportunity for smug-
glers, who take oil to Colombia and sell at
a higher price. So while Venezuela s oil pro-
duction has fallen by 800,000 barrels per
day since 1998, net oil exports have dropped
off by 1.1 million barrels per day over the
same time period. To make matters worse,
lower cost conventional output is being
replaced by much higher cost heavy oil pro-
There are a few more trends that have
plagued Venezuela s energy sector. The for-
mer President Hugo Chavez sacked thou-
sands of experienced oil workers in 2002,
replacing them with political operatives that
drained the company of some of its technical
proficiency. Perhaps more importantly, the
political program of the Chavista govern-
ment, both domestically and abroad have
reduced resources that PDVSA had on hand
to invest in new sources of production. The
government used revenues to spend on social
programs. Abroad, the government sent low
cost oil to allies in the region.
The dire financial situation that Venezuela
now finds itself in is forcing a rethink in
the government s approach, the Columbia
University report concluded. Subsidised oil
to Latin American and Caribbean countries
is being cut.
The government also tweaked regulatory
rules in recent years to attract more invest-
ment, giving a bit more control to foreign
companies. International investment did
indeed tick up over the last few years. Finally,
although no changes have occurred yet,
there is a growing public discussion over
reducing subsidies at the pump.
Nevertheless, these reforms are only nip-
ping around the edges of the problem.
PDVSA could have a cash flow deficit of
between US$12 and US$20 billion this year.
Venezuela s economy has become more
dependent on oil exports at a time when
volumes are declining and prices have col-
lapsed. GDP is expected to shrink by 10 per
cent, and foreign exchange is drying up.
The massive oil reserves in Venezuela are
only matched in size by the country s prob-
lems. It is no wonder that the government
is seeing its political support quickly evap-
for oil price 'lower
for even longer'
Venezuelan govt losing grip
as low oil prices take a toll
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